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Brickworks shares slide as company reports decline in earnings

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2023-09-28

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Shares in Brickworks (ASX:BKW) fell yesterday after the company revealed a decline in earnings for the year ending July 31. The shares were down approximately 9% during mid-session trading.

Total revenue for the 2022-23 fiscal year increased by 8% to $1.181 billion, driven by significant price increases in building products in the Australian and US markets in which it operates. These increases helped mitigate the impact of lower returns from its expanding property business.

The company reported that underlying earnings before interest, tax, depreciation, and amortization (EBITDA) declined by 26% to $784 million, while underlying profit after tax dropped by 32% to $508 million, resulting in a 54% decrease in statutory profit to $395 million.

Despite this reported weakness, the final dividend was increased by 2% to 42 cents, consistent with Brickworks' historical dividend policy. The total dividend for the year amounted to 65 cents, up from 63 cents per share in the previous fiscal year.

"Although earnings in FY23 were lower than the previous year, they demonstrated resilience in the face of several challenges, including rapidly increasing interest rates, significant inflationary pressures, widespread labor shortages, and raw materials supply issues," the company stated to the ASX on Thursday.

The Property division stood out, with the highlight being the sale of Oakdale East Stage 2 to the Industrial JV Trust with Goodman Group. EBITDA of $506 million was down 21% from the previous year's record performance.

Property earnings were also supported by ongoing development in the Oakdale West Estate in Western Sydney. Additionally, a strong increase in market rent for prime industrial property led to a revaluation gain, despite capitalisation rates increasing to an average of 4.1% across the portfolio, up from 3.7% at the end of July 2022.

Investments had a strong year, with higher dividend payments and a significant increase in the market value of Washington H. Soul Pattinson, despite a lower earnings contribution.

Within Building Products, sales remained resilient despite the impact of reduced building activity in both Australia and North America. Both countries experienced significant increases in labor and raw materials costs, resulting in lower margins.

In Building Products Australia, EBITDA fell by 13% to $100 million in FY23, excluding the one-off impact of land sales into the Brickworks Manufacturing Trust in the prior year. This decrease was attributed to higher costs and weaker demand. For instance, unit electricity costs for the Austral Bricks business were up 28% year-on-year, labor costs increased by 13%, and maintenance costs were up by 12%.

In North America, revenue of $447 million increased by 12% compared to the previous year. The increase was primarily driven by price hikes and sales growth through the vertically integrated retail division. EBITDA for the year was down 18% to $40 million, including a $7 million contribution from the sale and leaseback of a retail outlet. Excluding the impact of land sales in both FY22 and FY23, EBITDA was down 5% to $33 million.

Looking ahead to the new year, CEO Lindsay Partridge expressed optimism, particularly regarding the property sector, which has become the primary earnings driver:

"Within our Property Trusts, the development pipeline is strong, and we anticipate a significant increase in rental income over the coming years as new developments are completed and rent reviews are undertaken. Across Building Products, order intake is now softening, and we anticipate a decline in demand in the months ahead.

"Offsetting the impact of lower sales, unit margins will be supported by price increases and previously implemented plant rationalisation and upgrades. In addition, the exit of the loss-making Austral Bricks Western Australia business will provide a positive impact on earnings."

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